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Beaufort Securities Breakfast Alert: Concepta, DekelOil, BAE Systems and Barratt Developments

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"US equities rebounded mid-morning from an early move to the downside due to Trump's surprise dismissal of FBI Director, James Comey. Declines in Walt Disney and Boeing following earnings releases, however, eventually dragged the Dow Jones lower on Wednesday. A recovery in energy stocks and good support for tech issues nevertheless kept both the S&P500 and NASDAQ fractionally in the positive by the close although, after the bell, Snap slumped 18% as Snapchat's parent disappointed with release of its first quarterly report since listing. Crude oil for June delivery jumped US$1.45 to US$47.33/bbl following details of a steep weekly drop in inventories, leading the NYSE Arca Natural Gas Index and the Philadelphia Oil Service Index to surge by 2.6% and 2%, respectively, while a sell-off amongst Biotech issues meant the sector gave back just about all the gains it had put in on Tuesday, sliding around 1.4%. Traders otherwise remained somewhat reluctant to make moves ahead of the release of key reports on retail sales and producer and consumer prices due on Friday. U.S. government bond prices retraced early gains, ending Wednesday slightly lower after an auction of 10-year notes drew soft demand. Commodities-weighted Asian markets led most regional bourses gently higher Thursday morning, although the Shanghai Composite fell quite sharply amid fresh liquidity concerns. An official WeChat account run by the state-owned Securities Times, stated that the country's securities regulator held meetings on Monday with various brokers controlling large capital pools, which are said to total hundreds of billions of RMB mostly in the form of bonds, suggesting that new limits or penalties on speculative trading might be imminent. UK equities ended higher on Wednesday, outstripping those in Europe, primarily because of the main index's heavy weighting in oil stocks whose rise cushioned pressure from ongoing Sterling strength. Housebuilders also shone on the back of a confident statement from (LON:BDEV), which was followed yesterday evening by the positive release of the RICS House Price Balance index, which emerged unchanged at +22, against expectations of +20. Barclays (LON:BARC) also celebrated the re-election of its CEO with the best performance amongst the major banks. Further overnight news that it has agreed a US$97m penalty in settlement of SEC allegations of overbilling should also be taken positively, although it contrasts with Wednesday's punishing statements from Talk Talk (LON:TALK) and ITV (LON:ITV). London investors meanwhile have turned their attention to the Bank of England's interest rate decision and Trade Balance data which are due late this morning. Economists polled by The Wall Street Journal expect that Britain's global goods trade deficit narrowed slightly in March to GBP11.8bn, as the Pound's weakness boosted overseas demand for U.K. products. No change from the current 0.25% rate is expected today, with the Governor Carney expected to even allow the economy 'run hot' for a short period, exceeding his target 2% inflation target, for fear of otherwise upsetting forthcoming Brexit negotiations. Indeed, on Wednesday, the National Institute of Economic & Social Research, stated it expects the record low rate to be maintained until mid-2019. Only a tiny net change was recorded by the pan-European Stoxx Europe 600 index on Wednesday as it advanced just 0.10%, albeit to a fresh 21-month high, with the Xetra DAX up 0.07% and the CAC 40 up 0.05%. A good amount of macro data is due for release today, including from the UK March Manufacturing and Industrial Production and Trade Balance. Shortly afterwards at 11:00hrs GMT, the Bank of England releases its Interest rate decision and Monetary Policy Statement and Minutes, followed an hour later by the NIESR April GDP Estimate. The ECB is also due to detail a new Monthly Bulletin. The US will offer April Producer Prices and Initial Jobless Claims; speeches are also due from both the Fed's William Dudley and Charles Evans. UK corporates due to publish earnings or trading updates include Beazley (LON:BEZ), BT Group (LON:BT.A), Aldermore Group (LON:ALD), Galliford Try (GLON:FRD), Stobart Group (LON:STOB), Hill & Smith (LON:HILS), Rathbone Brothers (LON:RAT) and On the Beach Group (OTB.L). Another cautious European opening is anticipated this morning, with UK investors likely to remain on the side-lines ahead of the BoE statement and a possible sell-down amongst tech issues with this afternoon's US opening. The FTSE-100 is seen down 10 to 15 points in opening business."
- Barry Gibb, Research Analyst

Markets
Europe
The FTSE-100 finished yesterday's session 0.59% higher at 7,385.24 whilst the FTSE AIM All-Share index was up 0.42% at 972.70. In continental Europe, the CAC-40 finished up 0.05% at 5,400.46 whilst the DAX was 0.07% higher at 12,757.46.
Wall Street
In New York last night, the Dow Jones fell 0.16% to 20,943.11, the S&P-500 firmed 0.11% to 2,399.63 and the Nasdaq gained 0.14% to stand at 6,129.14.
Asia
In Asian markets this morning, the Nikkei 225 had added 0.37% to 19,972.92, while the Hang Seng firmed 0.25% to 25,078.83.
Oil
In early trade today, WTI crude was up 0.57% to $47.60/bbl and Brent was up 0.52% to $50.48/bbl.

Headlines
Snap shares slide as growth slows
Shares in Snapchat's owner have sunk after it reported disappointing growth in the first three months of the year. In its first results since floating, Snap said the number of daily active users rose just 5% to 166 million compared with the last three months of 2016. That was two million fewer than expected, but 36% higher than the same period last year. The news sent shares tumbling more than 20% in after-hours trading in New York. Snap's adjusted loss of $188.2m was about $10m higher than analysts had expected, while the net loss soared to $2.2bn from $104.6m due to costs associated with the IPO earlier this year. Revenue rose 286% for the quarter to almost $150m, but was also short of forecasts by about $9m.

Company news
Concepta (LON:CPT, 16.88p) – Speculative Buy
Concepta, the pioneering UK healthcare company and developer of a proprietary platform and suite of products targeted at the personalised mobile health market with a primary focus on women's fertility and specifically unexplained infertility, yesterday announced that it has signed a first distributor agreement in China with Beijing ThinkBrio Medical Technology Consulting Co., Ltd ('ThinkBrio'). The 3-year agreement gives exclusively to the distribution of the myLotus range of products within LiaoNing province in China, which, if successful, there is opportunity to extend agreement with ThinkBrio to cover further regions. Concepta's CEO, Erik Henau commented "Mr Liu has had a lot of experience with the development of our organisation in China and, through lengthy discussions and preparations, has built up a great understanding of the need for our products and how to promote and sell them in the region. This initial agreement offers us the opportunity to evaluate our logistics chain and marketing activities. It will allow us to gather data and experience for discussions with further distributors in China down the line and will help us to fine-tune our strategy for expanding manufacturing capacity". ThinkBrio's CEO, Liu Wei, commented "The myLotus products are unique and will be a great help to many women in China. We look forward to working with Concepta to develop their presence in the Chinese infertility market. We have already conducted rigorous testing of the products prior to launch and we are now in the final stages of hospital evaluations - after which we can begin commercialisation of myLotus in China."

Our view: The Board's strategy remains unchanged, focussing on the Chinese and European launch of myLotus. In China, Concepta is progressing to its expected launch of myLotus in H1 2017, having obtained regulatory approval, appointed an experienced country manager and manufacturing agreement in place. Yesterday's news added step closer by appointing distributor for LiaoNing province in China. With ISO13485 accreditation in place, management also continues to prepare for the commercial launch of myLotus in the UK and Europe towards the end of the year. This will ideally position it to deliver strong, organic growth from this product, while continuing additional efforts on research and development to expand the breadth and depth of the platform's features. This will enable it to develop a highly cash generative, market leading healthcare company within the huge and growing opportunity for personalised mobile health. Concepta's key challenge now is its transition from laboratory-based small volume manufacturing, to full-scale commercial manufacturing. As such, it is setting up a dedicated manufacturing facility in Doncaster, with initial manual assembly progressing to automated assembly, making it less dependent on supply-chain lead times. To put the scale of Concepta's opportunities into perspective, the Chinese market potential has been estimates to be worth around £250m, while the larger European opportunity is around £350m. Indeed, the total global opportunity addressed by Concepta's current product offering is estimated to be worth as much as US$2 billion. Further out, its technology platform is expected to be developed into a much wider opportunity for personalised monitoring and self-diagnosis. Beaufort reiterates its Speculative Buy rating on the shares, with a price target of 26p.

Beaufort Securities acts as corporate broker to Concepta plc

DekelOil Public Limited (LON:DKL, 13.75p) – Speculative Buy
The owner and operator and 100% owner of the profitable and vertically integrated Ayenouan palm oil project in Côte d'Ivoire, yesterday commented on recent speculation in the Norwegian press regarding its potential interest in acquiring Norpalm Ghana Limited ('NGL'), a subsidiary of Norpalm AS, a Norwegian company which owns a palm oil production company in Western Ghana. The Board confirmed that it is in discussions with both the board of Norpalm AS and certain Norpalm AS shareholders in relation to the potential acquisition of all or the majority of the shares in Norpalm by DekelOil. Norpalm AS holds 68.6% of Norpalm, which is a vertically integrated palm oil owner and operator with approximately 4,000 hectares of mature palm plantations under ownership. It is located in West Ghana, close to the border with the Ivory Coast. In addition, it operates a 30 tn/hr mill which also purchases fresh fruit bunches from local producers. In addition to the revenues it receives from approximately 15,000 tonnes of crude palm oil sold into the domestic Ghanaian market, it also operates a palm kernel oil press which produces approximately 2,000 tn of palm kernel oil in the Ghanaian market.

Our view: Looking to expand their horizons. With last month's Q1 2017 figures having demonstrated significant continuing progress while confirming the Group's intention to pay a maiden dividend with its forthcoming H1 2017 results, DekelOil has more than delivered on its promises. Yesterday's news recognises that its management is not prepared to stand still, but it is prepared to build out its operations in neighbouring Ghana. NGL's land concession spans an area of 4,500 Ha. - 4000 Ha. at Pretsea and 500 Ha. at Sese. NGL first began its replanting programme in 2002 and is now thought to be approaching full development. Its Palm Oil Mill processes fruits from its nucleus estate as well as buying fruits from more than 1,000 independent farmers and out-growers. The potential acquisition, if it were to proceed, would be classified as a substantial transaction for the purposes of the AIM Rules for Companies. Discussions are still ongoing and therefore there can be no guarantee that it will proceed. The Directors intend, however, that it would be financed through a combination of DekelOil's existing cash resources, new equity partners at project level and debt financing. Further announcements will be made in due course as appropriate, although the announcement suggests that the deal would not constitute a Reverse Takeover, and so not require publication of a prospectus, and neither would it affect the Board's wish to commence distribution of earnings from Ayenouan in the form dividends. Beaufort retains its Speculative Buy recommendation on DekelOil Public and repeats its price target of 23p/share.

Beaufort Securities acts as corporate broker to DekelOil Public Limited

BAE Systems (LON:BA., 640.50p) – Buy
BAE Systems ('BAE'), a world's 3rd largest defence company by revenue, providing some of the world's most advanced technology, aerospace and security solutions, up to a military capability, yesterday provided its AGM statement for the performance year-to-date. The Group said trading for the period has been in line with management expectations with unchanged FY2017 outlook of c.+5% to +10% (FY2016: 40.3p) growth in underlying earnings per share. During the period, BAE continue to win number of new orders, which includes, £1.4bn contract from the Royal Navy for the 6th Astute Class submarine, US$542m contract to provide 145 M777 ultra-lightweight howitzers to India and US$352m order received for the repair of US ship. BAE's CEO, Ian King, commented "We have started the year with good momentum building on a strong operational performance in 2016 and the business is performing well. Our strategy is well defined, we have a large order backlog, long-term programme positions and a well balanced portfolio. With an improving outlook for defence budgets in a number of our markets, in 2017 and beyond we are well placed to continue to generate attractive returns for shareholders". BAE is scheduled to announce its interim results on 2 August 2017.

Our view: BAE Systems' year-to-date performance remains in line with management's expectation. Its FY2017 outlook has been reiterated, supported by the number of new contract wins against a background of improving defence budgets in a number of its markets, which add longer-term visibility to Group operations. Looking ahead, in FY2017, BAE Systems expects underlying earnings per share to increase by 5%-10%. The Electronic Systems division (16.7% of sales) is expected to grow at c.5% with margins at the upper end of a 13%-15% range, while the Cyber & Intelligence division (9.0% of sales) is expected to deliver low single-digit sales growth with a 6%-8% margin. Sales for the Platforms & Services (US) division (14.6% of sales) are expected to be stable with margin in a range of 8%-9%, while Platforms & Services (UK) division (39.7% of sales) is set to record a sales decline of c.-5% with margins at the lower end of its target 10%-12% range. For the Platforms & Services (International) division (20.0% of sales), revenue growth of c.5% is expected with margins in line with FY2016 (10%-12%). The shares are valued at FY2017E and FY2018E P/E multiples of 14.7x and 13.9x along with a dividend yield of 3.4% and 3.5%, respectively. With a solid order backlog amid more favourable market conditions, together with the positive benefits of currency translation following Sterling's Brexit-related devaluation, we believe BAE Systems remains well placed to maintain good momentum. Beaufort reiterates its Buy rating on the shares. BAE Systems is one of the Beaufort's 'Tips for 2017' recommendations.

Barratt Developments (LON:BDEV, 610.00p) – Buy
The national housebuilder yesterday issued a trading update in respect of the period from 1 January to 7 May 2017. The statement confirmed market conditions remain good, with the Group delivering a strong performance since the start of the calendar year. Increased competition within the mortgage market has resulted in wide availability of attractive mortgage finance which, alongside Help to Buy, continues to support the very strong consumer demand. Management detailed the fact that total completions (including joint ventures ('JVs')) expected to be around 17,350 for the year, the highest number of completions in nine years. It also confirmed FY17 profit before tax is expected to be at the top of the range of current analyst estimates. The Group sales rate has risen to 0.80 (2016: 0.78) net private reservations per active outlet per average week and total forward sales (including JVs) are at record levels, up by 12.7% as at 7 May 2017, to £3,205.7m (8 May 2016: £2,844.0m). It also stated that its net cash position at 30 June 2017 is now expected to be around £600m. Given strong demand the Board expects to deliver completion and ASP growth for the full year. The Board went on to state that as a result of this strong performance, it expects full year profit before tax to be at the top end of the range of current analyst estimates.

Our view: Strong performance and confident outlook. The Group remains well on track to achieve its target of a minimum ROCE of 25%, with a focus on delivery of a 20% gross margin for full year 2017. Net cash also looks set to end 2017 ahead of consensus expectations, although at this time there is no change to the planned dividend payments of £1.4bn in the four years out to November 2018. Following this update, Beaufort has raised its 2017E and 2018E earnings forecasts by 5% and 4% respectively. Efficiency programmes underway also have scope to further narrow its still relatively wide return-on-equity gap with UK peers over the next three years, suggesting its current year P/NAV of 1.86x should move close to the sector average of 2.00x. A 2017E P/E multiple of 10.5x together with a yield of 6.7% still represent excellent value, although Barratt's relatively short land bank limits medium-term visibility, particularly given expectation that UK housebuilders are expected to attempt ramping up total national completions closer to the 240k to 260k (from some 170k presently) desired by government between now and 2020 for fear of otherwise being threatened with more punitive measures should the housing shortage continue of deteriorate. Beaufort remains overweight in the UK Housebuilders and continues to rate Barratt Developments as a Buy, although Persimmon and Taylor Wimpey remains our sector picks.

 

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